Households, during the last financial quarter of 2017 and the first two quarters of 2018, have been spending more than they earn. This is the first time since 1988 that households’ outgoings have outstripped their income for a whole year.
30 years ago, the shortfall was also much smaller at £0.3 billion. Today that shortfall is almost £25 billion.
The news comes from a report issued this week by the Office of National Statistics, ONS. They say each UK household spent or invested around £900 more than they actually brought home in income.
The ONS say that even in the run-up to the financial crisis of 2008 and 2009, when 100% (and more) mortgages were offered to home buyers without a deposit, the country did not reach a point where the average household was a ‘net borrower.’
Households struggle to make ends meet.
Households continue to struggle to make ends meet. Paying for the basics in life, such as household bills, rent, mortgage repayments and food is beyond the means of some households.
Borrowing has risen substantially and households now hold more debt. Unsecured debt, credit card spending and short-term loans has hit a record high of £214 bn, according to the Bank of England. This debt equates to an average of £7,800 a household according to one estimate.
According to the ONS, to fund this shortfall, households either have to borrow, at which point they could be living beyond their means, or dip into their savings.
And their data shows they are borrowing more and saving less.
Households took out nearly £80 billion in loans last year. The most in a decade. They deposited just £37 billion with UK banks, the least since 2011.
In total, households accumulated more debt (due mainly to loans) than assets (such as deposits, bonds, shares and pensions) in 2017 for the first time since records began in 1987.
If this were to continue, households could risk lacking enough collateral to cover their debts.
Why are we borrowing more?
We’re borrowing more and saving less partly because the interest rate, which dictates returns on money saved and the size of loan repayments, has been at or near a record low for the past decade.
The base rate set by the Bank of England is just 0.5%, compared with almost 15% in 1990, making financial conditions better for borrowers rather than savers.
Expectations of more interest rate rises can affect saving and borrowing behaviour, say the ONS.
Borrowing could rise in the short-term as households seek to take advantage of smaller repayments. Saving could be put off amid the prospect of higher returns in future.
Poorest households facing the most pressure.
The figures for the report show the average household’s finances. However, not all households face the same pressure on their budgets.
The ONS recently conducted a survey entitled expenditure poverty analysis. This was based on data from the ‘Living Costs and Food’ survey. It revealed the poorest 10% of households spent, on average, two and a half times their disposable income in 2017. The richest 10% of households, in contrast, spent less than half of their available income during the same period.
Going beyond disposable income and looking at wealth, defined as the value of savings, investments, pensions and assets, there remains inequality.
The wealthiest 10% of households were five times wealthier. Therefore, much less likely to live beyond their means than the bottom 50% of households in July 2014 to June 2016.
The ONS say “This analysis is experimental and the results presented are not official poverty statistics for the UK.”
The main points of the ‘Expenditure Poverty Analysis.’
In the financial year ending (FYE) 2017, of the UK population 22.8% was considered to be in income poverty and 21.8% was deemed to be in expenditure poverty.
11.5% of the population was in both income and expenditure poverty in FYE 2017.
Households in expenditure poverty spent the highest proportion of their total expenditure on food-related items (28.8%).
17.7% of all children were deemed to be in both income and expenditure poverty in FYE 2017.
31.7% of all lone parents were considered to be in both income and expenditure poverty.
The ONS finished its report by saying “It’s worth bearing in mind that some households at the bottom of the income distribution may be there only temporarily.”
“For example, many students will feature in the poorest 10% of households. Those in temporary low-income spells could be more likely to borrow or use savings to maintain their spending levels. Meanwhile, others on low income may be receiving benefits.”
“There’s evidence to suggest that certain types of benefits are under-reported in survey data, which could lead to income being underestimated at the bottom of the distribution.
Are we living beyond our means?
Click through the cards to see how household budgets have changed in the last 30 years.
What the experts are saying.
Head of savings and retirement at Aviva, Alistair McQueen, said:-
The UK had “fallen out of love with saving, again”.
“For this first time in more than a decade, we have been spending more cash than saving for three quarters in a row. The last time this happened we were in the midst of the great financial crisis of 2007 and 2008.”
“Money is tight. Incomes continue to flat-line, debts continue to rise, and interest rates are starting to creep up. Many households are struggling to keep their heads above their financial waters.”
“For many it is wise to save for a rainy day. It may not be raining yet, but there are clouds gathering.”
Kate Smith, head of pensions at Aegon, said: –
The figures “paint a poor picture of the UK’s economic wellbeing overall”.
Despite UK economy growth increasing to 0.6% in the three months to the end of July, “consumers continue to feel the pinch on their purse strings,”
“Many households may feel that they are just getting by. Today’s figures reveal that not only has real household disposable income per head fallen, but many households’ spending is exceeding their gross disposable income.”
“Given ongoing Brexit negotiations and uncertainty around interest rate hikes, consumers are wise to monitor their personal finances closely and avoid burying their heads in the sand. Setting aside as much as possible.”
Mental health experts say that facing up to debts can be daunting. However, it is important to take that first step and seek advice. That simple first step can be life changing for people in debt who may not realise they can get help. Debt is one of the biggest causes of stress, anxiety and mental health issues.